Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

Finally, in early 2009, the Fed began to move from emergency liquidity provision to what would subsequently become known as QE1—the buying up and holding on the Fed balance sheet of large quantities of mortgage-backed securities. For a central bank, buying securities was a conventional mechanism of monetary policy. But it would now be done on a far larger scale than ever before and with a wider array of assets. On top of the conventional purchase of Treasury securities, the Fed bought $1.85 trillion in GSE-backed mortgage-backed securities by July 2010. The busiest week of purchases was the third week of April 2009, and holdings (net of sales) peaked in June 2010 at $1.129 trillion. Crucially, what the Fed was doing was not just pumping liquidity into the system. It was also absorbing onto its balance sheet the maturity mismatch, which had done such damage in markets like ABCP. The Fed took the long-term asset in exchange for immediate liquidity.